Report from Investica
Attention initially is likely to be focussed on the Chinese markets following the central bank interest rate increase on Friday. With the tightening announced after the market closed on Friday, Monday will be the first chance to react.
A sharp drop in the Chinese market would increase risk aversion levels and would tend to strengthen the yen. The dollar would also be likely to strengthen slightly against the Euro while the Australian dollar would be at risk.
The markets are still in the mood to look for a quick recovery from losses and the impact should be limited. Nevertheless, Asian market trends are likely to be an important theme this week, especially with China due to hold trade talks with the US. Overall levels of risk aversion, global stock market trends, carry trades and credit risk will be very important influences throughout the week. The markets overall are entering a very dangerous phase.
There is little in the way of major US data during the week and what there is, is concentrated on Thursday and Friday. A solid reading for durable goods orders and another low reading for jobless claims would sustain the greater degree of optimism over the US economy.
The housing sales releases are, however, likely to be of most importance as the data will provide crucial evidence on housing trends and the chances of a near-term recovery. Rising sales and falling inventories would be a strong positive influence on the dollar.
The Euro-zone data will be watched closely during the week, especially with the Euro-zone now reaching a critical stage as previous ECB interest rate increases start to take effect. Unusually, the German ZEW and IFO indices are released in the same week on Tuesday and Thursday respectively. The industrial orders data will also be watched on Wednesday and any evidence of vulnerability in these releases could trigger a sharp round of profit taking on long Euro positions.
The main UK focus will be the Wednesday Bank of England minutes. The principal focus is likely to be whether there were calls for a 0.5% rate increase or whether the bank hints that is considering another increase as early as June. Sterling will need a tough set of minutes to make any strong headway.
